Friday, January 16, 2009

Debt: Good or bad?

Our Wednesday night class has been discussing money over the past few weeks. Lately we've been talking about debt, and debating whether or not debt is a good thing or a bad thing.

We all know what Dave Ramsey would say. And a lot of people agree with him. One such person blogs regularly about all things financial, and has stated that she and her family are going to save up enough money to pay cash for their first house.

That's a lofty goal, and I have to admit that it is awe-inspiring, especially since she is on track to accomplish it. But when I really started to think about the logistics of the plan and crunched some numbers, I found that it may not be as beneficial as most would think. Trying to avoid debt may COST more.

As long as you're renting property, you aren't getting ANYTHING back for the money you spend in rent each month. No equity at all. And the money you're setting aside for that house purchase?...Unless it's in a CD or savings account that is earning a fantastic rate (which is rare right now), it's either barely keeping up with inflation or it's depreciating.

With mortgage rates so low right now, it's a great time to purchase a home, even with no money down! The key is the extra principle payments. Let's say someone were to buy a $200,000 home with no money down and an interest rate of 5.0% (assuming a 30-year term). That's a monthly payment of about $1074. And let's say they put an extra $2000 per month towards principle. They would pay off the house in 6.5 years! The total paid (including interest over the life of the loan) would be about $234,000.

If that same person were to pay about $800 a month in rent and lay aside $2274 a month to save for the house, they would have enough to buy the $200,000 house in about 7.5 years. The total they will have paid by that time (including rent) would be $272,000. More money, more time spent in a rental.

Is it really worth it to wait, just so you won't have any debt? Wouldn't taking on a large debt like a mortgage be a good thing, since you would pay less over the long-run?

The same goes for college loans. I was able to get several good scholarships for school, but I certainly didn't have the money to pay for the remainder. Would it have been worth it for me to work for a few years to save that money and then go to school?

Well, it would have taken a while to save up enough, since I wanted to attend a private university. I would have gotten a late start on my career, since I would be several years behind my peers. Being an older graduate might have subjected me to age discrimination when applying for starting positions.

But since I took out a loan, I was able to graduate on schedule and get a better-paying job right out of school. I was better equipped to pay for my education AFTER getting the degree than beforehand. I feel I made the right decision.

I guess it comes down to a personal feeling about debt. To me, debt is a tool. It can be risky, but if I use it correctly and wisely, it can be a great help and actually SAVE money over the long run. So I guess I would say debt is a good thing.

Sorry, Dave. : )

1 comment:

Holly said...

I completely agree! Debt is a tool that can help you. At the same time you have to respect it and remember that you have to be responsible. You must take responsibility for your own actions.

Great blog! Keep up the good work!